Wednesday, January 13, 2010

I went over some bearish Wolfe waves yesterday on SPX and EEM. Today we are seeing a respect for the longer term trend. My take is still short term bearish, but the indices must break prove themselves by breaking below the trend.

President Louis Fairchild of Fairchild Publications: "A late Easter is expected to aid sales of men's, women's and children's apparel accessories."

Editor A. C. Saunders of Furniture Manufacturer: ". . . the business, valley will not be deep and will be crossed during the first quarter of 1930."

Editor Peter A. Stone of American Contractor: "During the year 1930 the volume of building construction work materializing will be greater than in 1929. . . ."

Editor J. S. Warren of Hotel Management: "During 1930 hotels should prosper as a result of the intensified sales efforts that most manufacturers and others will make, in that more salesmen will be on the road."

Editor Carl W. Stocks of Bus Transportation: "The year looms bright for the industry."

So how did we do with all these glowing predictions?

Yellow shade is the calendar year 1930 which started out at 267 and ended down 38% at 160.... and proceeded to bottom in 1933 at 50 points.

Dr. Pangloss never dies, and deflationary cycles tend to rhyme. My guess: we are at about April of 1930 today.

1. PAYROLLS. ADP payroll numbers came in (slightly) worse than expected and the market is up. Granted, this is not very well correlated to the important BLS NFP due out Friday, but it has to be some indication. The market is up over 1% since last month's NFP and we are factoring in a positive jobs number for this Friday. If this disappoints, what will happen? If it's slightly better than expected, is that already factored in? My guess is that either way we have a better-than-even chance that we sell the news.

2. SENTIMENT. The AAII bull/bear ratio is at multi-year highs going back to Feb 2007... the market high was Oct 2007. As Eric points out, this may pre-date any market correction by weeks or even months, as it did in 2007, but this certainly is not an indicator to put lots of new money into the market. One young trader being interviewed by Mandy Drury on CNBC stated yesterday, "Well as long as the market keeps going up, then we're still buyers." Okay. I realize that traders rarely look at fundamentals, but this naked sentiment belies the mindset of this historic market move.

My favorite recent indicator is the latest comment by Dan Gross, Newsweek's financial guru, who actually said in his latest post called Snap Out of It: "Maybe it's time for a little blind faith." Yup. After a 67% move, mind you, he's implying we don't have enough "faith." Any contrarian worth his salt would view this as an intermediate top.

3. CALIFORNIA. The sixth largest economy in the world may need to take drastic measures to avoid bankruptcy. Nuff said. Think about what this will do to jobs and consumer spending in the intermediate term.

4. GREECE. Okay, this is bit esoteric since Greece is tiny compared to California, but it's a reminder that sovereign defaults are still in play and gives a picture about how data is viewed thru a bullish lens. The ECB has stated emphatically that they are not willing to forward any more bailout money to Greece and in response the Greek Finance Minister has said that he doesn't need any more help, thank you. “Hopefully what they will be seeing will be reassuring them that indeed we are moving in the right direction and they should continue funding our large debt,” he said.Hopefully? Think about this. What was he supposed to say in response to to the ECB's hard line, Well, then we're bankrupt? Not. The market seems to think this is a bullish statement, up over 4% today... I would be wary.

Okay, I've been wrong plenty times before and my market allocation has been mostly cash and bonds according to T.Lo's Dollar Core Portfolio since November. I've been around long enough to have grown comfortable going against the crowd: the goal is to survive, like the cockroach.

FWIW, if the jobs number is positive on Friday, I'll gradually increase my stock allocation and scale back in slowly according to T.Lo's Strategic Portfolio.

Eric will view this bearish sentiment as a contrarian bullish indicator, but it's a tiny drop in a sea of bullish sentiment.